The emerging NewWorld A regulatory update
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The emerging New World A regulatory update Edinburgh 16 September 2009 Simon Morris & Jean Price
Transcript of The emerging NewWorld A regulatory update
The emerging New World
A regulatory update
Edinburgh
16 September 2009
Simon Morris & Jean Price
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Looking at …
1. Retail Distribution review
2. Policy – how does FSA view events?
3. Delivery – the new regulatory environment
a) Supervision
b) Arrow
c) Governance
d) Enforcement
4. The debate on regulatory reform
5. A word about transparency
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1. Retail distribution review
Retail Distribution Review
An Update
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Where are we now?
June 2006 – RDR launched
DP 07/01 A Review of Retail Distribution June
2007
Interim Report April 2008
Feedback Statement 08/6 November 2008
CP 09/18 Distribution of Retail Investments;
Delivering the RDR Jun 2009
CP 09/18 closes 30 October 2009
Policy statement and final rules due Q1 2010
Take effect from end of 2012
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The objectives
Engagement with consumers – more clarity of
products and services
Needs and wants addressed
Remuneration that works in favour of
consumers
Standards of professionalism
Viable firms – delivery of commitments and TCF
Regulatory framework to support delivery but
not inhibit future innovation
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How will these be achieved?
Widening the range of products
New standard of independence
Clearer advice landscape
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What we will cover today
Describing and disclosing advice services to
consumers
Streamlined advice processes and non-advised
services
Incentives and charging
Professional standards for advisers
Wider Implementation
Describing and disclosing advice
services to consumers
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Describing and disclosing advice
services to consumers
Retail investment products
Comprehensive and fair analysis
Unbiased, unrestricted advice
Describing the advice service
Independence and group personal pensions
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New definition “Retail Investment
Products”
Packaged products
Unregulated CIS
All investments in investment trusts
Structured investment products
Investments offering exposure to underlying
financial assets in a packaged form
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Comprehensive and fair analysis
Expected to consider more than packaged
products
Sufficient knowledge – suitable outcome
Relevant markets
Panels and third parties
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Unbiased, unrestricted advice
Contractual arrangements, constraints and
obligations
Advisory firms owned or part-owned by product
providers
Thematic review on use of platforms
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Describing the advice service
“Restricted advice” – label is not enough
Oral disclosure mandated
No mandated form for disclosure written - yet
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“Independence” and group personal
pensions
Exemption for firms advising on GPPs removed
Practical implications
Streamlined advice processes
and non-advised sales
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Streamlined advice processes and non-
advised sales
Simplified advice processes
Basic advice
Non-advised services
RDR and Moneymadeclear
Incentives and Charging
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Incentives and charging
What does it mean for adviser firms?
What does it mean for product providers?
What does it mean for vertically-integrated
firms?
Adviser charging
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What does it mean for adviser firms?
End to the current commission system
Strengthening approach to inducements
Adviser charging
Setting and operating charges responsibly
Ongoing service
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What does it mean for product
providers?
New responsibilities
Ban on commission
Ban on negative charges
Responsibilities on providers that deduct
adviser charges
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What does it mean for vertically-
integrated firms?
Recognition that proposals may not be
appropriate
Possible greater focus on internal remuneration
and incentives
Separating product and adviser charges
Providing equivalent information
Representative charges
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Adviser charging
Setting an overall charging tariff
Product provider information – what FSA wants
and what it is doing
Inducements and remuneration
The “enhancement” test
Non-monetary benefits
Individual advisers
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Adviser charging - contd
Transition to adviser charging
No retrospective review required
European framework
Corporate pensions
Non-advised sales
Professional standards for
advisers
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Professional standards for advisers
Qualifications
– Benchmark qualifications
– Transitional arrangements
– Alternative assessments
Ethics
CPD
Wider Implementation
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Wider Implementation
Supervision Strategy
Changes to reporting requirements
Prudential requirements
Other sectors
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2. Policy – how does FSA view
events?
Greatest global financial crisis in 70 years
Collapse of confidence in banks hits economic
development
Caused by
– Complexity
– Falling standards
– Increased leverage
– Underestimation of liquidity risk
– “irrational exuberance”
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FSA reviews its policy
Failure to conduct macro-prudential analysis
Wide ranging intellectual failure
Some institutional failure
Need to review policies
– More effective & focused supervision
– Focus on individuals in firms
– Liquidity, capital & remuneration
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FSA formulates its plans
New rules on capital adequacy
New liquidity rules
On the “wish list”
– International coverage
– Extending to “shadow banks”
Plus
– A focus on systemic risks
– A new supervisory approach
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A new view from FSA
First priority was crisis measures
Next priority is better supervisory approach
But retain consumer focus
– Personal protection insurance
– RDR
– Mortgage market review
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But beware Lord Turner’s jam
The supermarket experiment
Choice caused confusion used to justify
– Is there too much innovation?
– Are some products too complex to be sold?
– Should FSA intervene on pricing?
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3. Delivery – the new regulatory
environment
FSA recognises that
Business models are under strain
Distraction from business-as-usual
Increasing financial crime
Loss of consumer confidence
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The response expected from firms
So FSA expects
Stress testing for sustainability
Reassessing risk and revisiting its management
Reviewing capital and liquidity
Alert to financial crime
Delivering on individual responsibility
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The new supervisory approach
Supervisory Enhancement Programme
– Increase in frontline supervision
– Increase in specialist resources
– Shift in style and focus
Rigorous analysis of
– Balance sheets
– Accounting and valuation
– Strategy
– Risk management
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And also
More frequent meetings
More frequent MI
Closer engagement on projects
Pushing the non-relationship managed
perimeter
More interviews
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Interviewing key personnel
When
– ARROW
– Appointment
– All the time
Asking
– Competence
– Understanding
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Five key messages to convey
1. I know my role
2. I know the strategy
3. I know the risks
4. I understand our governance
5. I understand the new world
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In practice
Challenge to management
– “Intensive & direct”
– No longer “get on with it” but making judgements on managements’ judgements
Current examples
1. Ring fencing capital
2. Denying expansion
3. Requiring restructure
4. Challenging viability
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Arrow - what’s new?
1. More demanding engagement
2. Closer connection between FSA concerns &
interviews
3. Your judgement under review
4. Personal competence being assessed
5. Directly impacts relationship, RMP & ICG
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How does FSA view ARROW?
High level review of a business
Fact finding exercise – not designed to “catch
out” firms or individuals
FSA has requested certain information ahead of
the visit – forms basis of the interviews
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The core issues
Risk
– What is it?
– How do you manage?
Governance
– How do you take decisions?
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Plus other issues
1. Strategy
2. Sustainability
3. TCF
4. RDR
5. ICAAP
6. And specifically for your firm
a) Risk management
b) Legacy issues
c) Managing outsourcing
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Key preparation
Understand the group strategy
Know the issues … and the answers
Understand the new environment
Be consistent
Grasp
– How risk is managed
– How decisions are taken
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The messages to convey
1. I know my role
2. I know the strategy
3. I know the risks
4. I understand our governance
5. I understand the new world
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Governance – what FSA may ask
How was the decision taken?
By what committee?
What terms of reference?
What was their competence?
On what information?
Considering what alternatives?
Against what criteria?
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The board – what FSA expects
Chair runs fairly
Senior management reports clearly
Proper flow of MI
Directors’ challenge
Orderly process
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NEDs – what FSA expects
Possess expertise
Understand strategy & risks
Receive MI and prepare
Attend meetings
Challenge
– Governance
– Executive management
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Enforcement – new emphasis on
individuals
An investigation will now normally include
relevant individuals
– Chief executive
– Chairman
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A more intelligent approach to fines
Based on income
For individuals, based on gain
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Further emphasis on “the theme”
Mortgage arrears charges
Major statement coming
Willingness to settle
Focus on redress
Focus on amended charges
In return for
– No investigation
– No individual discipline
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4. The debate on regulatory reform
1. The Turner Report & DP 09/2 – official
2. The White Paper … getting warmer
3. The Sassoon Report – Opposition paper
4. The Commission paper
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Turner report & DP 09/2
Focus on banks – but relevant for insurers
– Liquidity a key issue
– Capital
– Countercyclical
– Trading book
– Constrains commercial banks
Regulation
– Form over substance
– Reach offshore
– Regulate shadow sector
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Regulator
– Macro prudential analysis
– Work closer with Bank & Treasury
– Focus large banks
– Models not process
– Individual skills & remuneration
Internationally
– Coordinate bank supervision
– Seek localisation or subsidiarisation
– Replace committees with oversight body
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The White Paper – Reforming Financial
Markets
Stability has been restored – commercial
banking
Focus on retail remediation
Universal regulator is the right model
Handling the causes
– Corporate governance
– Excessive risk taking
– Remuneration practices
– Poor risk management
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So the regulator should …
Look for system-wide risks
Look outside the boundaries – OBS vehicle
disclosure
Review capital pro-cyclicity
Formalise international co-operation
More regulation for systemically significant firms
– Capital internalises cost of failure
– Closer supervision
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Give FSA new powers
Financial stability objective
Enhance rule-making powers
Extended information gathering
Consumer protection
Compulsory CAT
Wider implications – collective redress
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Sassoon – the Government in waiting
Overall a weak system
– Bank – focus on systemic risk; financial
stability; lead internationally
– Treasury – macro economic
– FSA – poor micro prudential regulation;
split so conduct of business alone?
Achieve better handling of a financial crisis
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European financial supervision
– all change!
... the EU cannot remain in a situation where there is no mechanism to ensure that national supervisors arrive at the best possible supervisory decisions for cross-border institutions; where there is insufficient cooperation and information exchange between national supervisory authorities; where joint action by national authorities requires a tour de force to take account of the patchwork of regulatory and supervisory requirements; where national solutions are most often the only feasible option in responding to European problems, where different interpretations of the same legal text abound.
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European Systemic Risk Council
Analyses macro-economic data
Issues and follows up on warnings
Publicised and expect to be followed
Accountable to EU Council & Parliament
Quarterly meetings
Comprises central bank governors
Mervyn can take Adair … as an observer
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European System of Financial
Supervisors
European Banking Authority
European Insurance & OP Authority
European Securities Authority
FSA Chairman may be a “director” and
nominate a manager to each Authority
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Who will do the following …
Single set of harmonised rules
Binding technical standards
Guidelines for licensing & supervision
Common x-border supervisory standards
Ensure coherent application of EU legislation
FSA will supervise national entities
Colleges will supervise x-border entities
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5. A word about transparency
Information Commissioner
FSA plans
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Information Commissioner – sense at
lastHigh Court Decision (Owen & Lewis appeals)
Distinguishes
– Information that FSA generates – not confidential A
– Information FSA receives from firm or its investigators – confidential B
– FSA’s opinion of it – not confidential C
Must look at information FSA receives in context (includes public domain) – general statement followed by specific name
But all turns on actual disclosure request.
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FSA transparency – rather less sense
FSA confirms presumption in favour of
transparency & draft Code
Complaints data
– MiFID stops FSA publishing
– But FSA will require firms to do so
– Prescribed contextualisation
